Ukraine Bond Rally Seen Tied to New Aid Amid Default Concern

By Justin Carrigan -
Feb 24, 2014

With Ukraine’s new leaders saying the economy is in peril and a debt default possible, bond investors are looking for clues that fresh aid is on its way.

The nation’s benchmark dollar debt due in April 2023 posted its biggest gain in two months, with the yield dropping 93 basis points to 9.26 percent by 8 p.m. in Kiev. The rally followed an 82 basis point drop on Feb. 21, before lawmakers ousted Viktor Yanukovych as president and handed his powers to new parliamentary speaker, Oleksandr Turchynov.

While the removal of Yanukovych raises the prospect of an end to clashes that killed dozens last week and plunged the $176 billion economy into turmoil, it raises the question of how Ukraine will shore up the hryvnia and pay debt. Europe, the U.S. and the International Monetary Fund have said they’re prepared to offer aid. Russian Finance Minister Anton Siluanov said last week the situation in the former Soviet republic must stabilize before it gets more of the $15 billion pledged in December.

“We have to wait for a new government and what the first words of the new prime minister are about financing,” Alexander Valchyshen, the head of research at Investment Capital Ukraine in Kiev, said by phone yesterday.

Turchynov, given presidential powers as lawmakers prepare to form a coalition government, said on the parliament’s website over the weekend that the economy was in a “pre-default situation.” Standard & Poor’s cut the nation’s credit rating to CCC on Feb. 21, eight levels below investment grade, saying the country risks default.

The nation’s interim government said the country needs $35 billion of financial assistance to avoid default as it issued an arrest warrant for Yanukovych for his role in last week’s violence. Lawmakers in Kiev are working on a coalition government, which needs to be in place before Ukraine can receive aid.

The hryvnia weakened 2.5 percent to 9.175 per dollar, according to data compiled by Bloomberg. The central bank scaled back its support for the currency after foreign reserves plunged 28 percent in the past year to $17.8 billion at the end of January, the lowest level since 2006.

EU, Russia

For investors, any signals on financing from the European Union, IMF and Russia will be important, according to Gillian Edgeworth, chief economist for emerging Europe, the Middle East and Africa at UniCredit SpA in London.

“We should be provided with some sense of direction from the EU and Russia in the coming weeks,” Edgeworth wrote in a report yesterday. “At least from a macro perspective, the best-case scenario is one whereby Ukraine moves towards an IMF-EU deal and while even this scenario may mean that a debt restructuring is unavoidable, it will provide Ukraine with its best chance of sustainable growth.”

Ukraine has $17 billion of liabilities coming due, excluding interest, through the end of 2015, including $1 billion of bonds maturing in June this year, according to data compiled by Bloomberg.

IMF Support

The IMF is ready to engage with Ukraine if the country requests advice or support from the Washington-based lender, Managing Director Christine Lagarde said in an interview with Bloomberg News in Sydney on Feb. 23.

The standoff in Ukraine started in November when the president backed out of a free trade deal with the EU, opting instead for closer ties with Russia, which in addition to a bailout pledge offered cut-price supplies of natural gas.

Yanukovych fled Kiev over the weekend as opposition leader Yulia Tymoshenko, who led the 2004 Orange Revolution overturning a Yanukovych election victory, was released from jail and vowed to return to politics.

“The fact that the opposition groups have prevailed means that the Russia rescue deal of last December will now almost certainly be withdrawn,” Chris Weafer, a senior partner at Moscow-based consulting firm Macro Advisory, wrote in a report. “Ukraine will need a substitute deal from the EU and IMF very quickly. Without it there will be a technical debt default imminently and the economy will continue to slide.”